Duty Free Shops supplies not Exports under GST

Though section 105 of CGST Act states that every proceeding before Authority for Advance Ruling (AAR) shall be judicial proceedings, however, Rule 103 of CGST rules states that both the member judges of this authority shall be officers not below the rank of joint commissioners. Departmental officers are members of this so-called 'judicial proceedings' in AAR.

Further, section 103 states that AAR ruling shall be binding on the applicant and concerned 'jurisdictional' officer of the applicant.

With this background in mind, below is the analysis of recent Delhi AAR ruling in the application of ROD Retail Private Limited:

Facts in Hand:

Applicant was supplying 'sunglass hut' (hereinafter referred to as 'goods') to international outbound passengers (i.e. passengers going out of India) from the duty-free shop (retail outlet) located in the security hold area of IGI Airport, Delhi (i.e. security hold area is located beyond the customs area. A passenger for boarding flight needs to first pass customs and immigration area (where customs verification happens) and thereafter these shops are situated in security hold area/departure lounge). These goods are purchased by applicant from Gurgaon at 28% IGST.

Question on which ruling was required?

Applicant wishes to obtain an advance ruling as to whether such supplies of goods qualify as 'exports' within the meaning of section 2(5) of IGST Act and consequently zero-rated benefit is available.

Contentions of the Applicant:

1. In the case of M/s Hotel Ashoka (International Tourism Development Corporation Limited) vs. Assistant Commissioner of Commercial Taxes (Civil Appeal No. 2560 OF 2010), Supreme Court (SC) quashed the demand of VAT/Sales tax by Karnataka government categorically stating that 'sale or purchase in the course of import or export' are constitutionally exempt as per article 286 and no state can demand any tax on such sales as per article 286 read with section 5(1) of CST Act. SC held that 'duty-free shops' though may be geographically located in India but these are located beyond the customs area and transaction would be said to have been taken place out of India. 'Territorial extent of India' starts after goods crosses customs frontier/area.

2. Applicant also stated that these are akin to high seas sales.

3. Applicant referred to Section2(5) of IGST act as per which export of goods means 'taking goods out of India to a place outside India'. Applicant contended that both the limbs are satisfied i.e. 'Taking of goods out of India' is satisfied when the goods are brought to duty-free shops by an applicant after crossing customs and immigration area and 'To a place outside India' is satisfied when the passenger takes them out of India.

Contentions of the Department:

1. As per section 2(56) of CGST Act, India means territory and includes territorial waters, exclusive economic zones, etc. which extend till 200 nautical miles. Therefore, these shops are well within the territory of India.

2. SC ruling was based on Article 286 (before amendment on 08.09.2016) and section 5(1) of CST Act which debarred only the state governments to levy VAT/Sales tax on such sales.

3.Further, as per article 269(1) (before amendment on 08.09.2016), Central Government was very well empowered to levy tax though the same was assigned to state government. Only levy of tax basis such assignment was declared constitutionally invalid since no tax can be levied by state governments on 'sale or purchase in the course of import or export' as per article 286.

Discussion and Ruling:

1. SC ruling basis Article 286 of Constitution and section 5(1) of CST Act, debarred 'States' to levy VAT/Sales Tax on such transactions.

2. Now as per the amended position tax can be levied. (Though ruling states only this line, however ruling meant that 'Center is empowered to levy IGST by way of IGST Act' and IGST shall be charged since this supply is 'inthe course of inter-state trade or commerce').

3. Further, the contention of the applicant that definition of export is satisfied as one leg of the transaction completed by the applicant and one leg by the passenger cannot be accepted. To qualify the same as exports, it is necessary that the same should cross 'India' and not just customs frontier/area.

4. Accordingly, supplies by the applicant are not exports and zero-rating is not available.

Author's Comments:

This is a very strict interpretation of the law.
Once the SC has held that these shops though may be in India geographically but for taxability purpose, these are out of India and therefore there is no reason to levy tax on such supplies.
Moreover, even when one accepts this ruling, how will international outbound passenger claim refund since section 15 of IGST Act which permits refund to an international tourist is not yet effective. This is double play by the government.
Further, even when section 15becomes operational, there shall be no mechanism to claim refund since these goods are purchased from a shop in security hold area/departure lounge by a passenger who has already crossed customs area. Whether a passenger will go back to customs area to get the refund or will board his flight. Moreover, even when he wishes to come back, he will be treated as if as an inbound passenger and not outbound passenger.
Atleast in this application, the applicant was only supplying goods to passengers having international boarding pass which clearly signifies that goods shall be taken out of India.
This is against the basic principles of Indirect tax law and International commercial terms. It is against the concept of a destination based consumption tax with the formulae that 'goods should be exported and not the taxes'.

The author can also be reached at ca.shivashish@gmail.com

No part of this article shall be reproduced, copied in any material form (including e-medium) without written permission of CA. Shivashish Karnani.The information provided is not a substitute for legal and other professional advice and meant only for academic discussions.